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The loan, to be extended as a 27-month Stand-By Arrangement, is subject to final approval by the IMF's Executive Board but could be discussed before the end of this year under the Fund's fast-track emergency financing procedures.

The IMF-backed loan will enable Latvia's government to implement a strong package of policy measures aimed at stabilizing the economy. "The program aims to alleviate immediate liquidity pressures, restore long-term stability, and enhance competitiveness. It is centered on the authorities' objective of maintaining the current exchange rate peg, recognizing that this calls for extraordinarily strong domestic policies, with the support of a broad political and social consensus," IMF Managing Director Dominique Strauss-Kahn said in a press release.

The announcement of a staff-level loan agreement for Latvia takes place against the backdrop of a worsening economy. In its latest assessment of the global economy, the IMF cut its forecast for global growth by ¾ percentage point to 2.2 percent for 2009. A growing number of emerging market countries have sought financial assistance from the IMF in recent months, and new loans worth a total of $40 billion have been approved for Ukraine, Iceland, Pakistan, and Hungary.

Strong policies

The program announced by Latvia's government includes measures to stabilize the financial sector and restore depositor confidence. It will also require a substantial tightening of fiscal policy: the government is aiming for a headline fiscal deficit of less that 5 percent of GDP in 2009 (compared with a deficit of 12 percent of GDP if no new measures were taken) as a means to reduce financing needs and improve competitiveness. Structural reforms and wage reductions, led by the public sector, will further strengthen competitiveness and facilitate external adjustment.

"These strong policies justify the exceptional level of access to Fund resources—equivalent to around 1,200 percent of Latvia's quota in the IMF—and deserve the support of the international community," Strauss-Kahn said.

Strauss-Kahn also noted that, while expenditure cuts are necessary, they should be structured to support long-term growth and respect social objectives. "The IMF supports the protection of social spending embedded in the program," he said.

The loan from the IMF will be supplemented by financing from the European Union, the World Bank and several Nordic countries. The EU will provide a loan of €3.1 billion ($4.3 billion), the World Bank €400 million ($557.6 million), and several bilateral creditors [including Denmark, Estonia, Norway, and Sweden] will contribute as well, for a total package of €7.5 billion ($10.5 billion).

"We will continue assisting the Latvian authorities in their courageous efforts to adjust in the midst of the global financial turmoil and we will work closely with them and other stakeholders as the program unfolds," Strauss-Kahn said.